Monopoly

Question 1

What is a monopoly?

Answer 1

A form of market structure in which there is only one seller of a good or service

Question 2

What is first-degree price discrimination?

Answer 2

A situation arising in a market whereby a monopoly firm is able to charge each consumer a different price

Question 3

What is arbitrage?

Answer 3

The practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which the unit is traded

Question 4

What is dynamic efficiency?

Answer 4

Lowering the position of the AC curve over time by improving production processes. Investment in new machines and technology may enable an increase in labour productivity.

Question 5

What is X-inefficiency?

Answer 5

Actual AC is above the AC curve due to lack of competitive pressure

Question 6

The assumption of the monopoly model are?

Answer 6

1) The firm aims to maximise
2) There is a single seller of a good
3) There are no substitutes for the good
4) The market has barriers to entry
5) There is imperfect knowledge

Question 7

An advantage of a monopoly?

Dynamic?

Answer 7

1) Could be dynamically efficient: Higher profit levels than more competitive firms means more scope to invest SNP into R&D. It may choose to develop advance technology or train workers if it knows this will keep barriers to entry high

Question 8

An advantage of a monopoly?

EofS?

Answer 8

2)Benefits from economies of scale: being the sole supplier means scope for benefiting from economies of scale and achieving a lower AC than a competitive firm could. Even with a high profit per unit, the price charged could be lower than in a more competitive.

Question 9

A disadvantage of a monopoly?

Economically Inefficient?

Answer 9

1)Productive and allocative inefficiency mean that quantity supplied to consumers is restricted, reducing utility and at a higher price, further reducing consumer utility - an inefficient use of scarce resources

Question 10

A disadvantage of a monopoly?

X-inefficient?

Answer 10

2)Could be X-inefficient: lack of competition reduces incentive to reduce excessive stock levels or overstaffing, leading to higher prices for consumers and lower utility

Question 11

Evaluation for a monopoly?

Answer 11

Depends on the objective the firm is trying to seek - a state owned monopoly might seek allocative efficiency and be mandated to consider social costs and benefits

Question 12

What is price discrimination?

Answer 12

Is when a seller charges different prices to different customers for the exact same product

Question 13

An advantage of monopolist price discriminating?

Benefits some consumers?

Answer 13

1)Lower prices for some consumers
Consumers that receive lower prices are able to use the same high quality
good or service at a lower price - they may not have been able to afford th
higher price paid by other users

Question 14

A disadvantage of monopoly price discriminating?

Doesn’t benefit all consumers?

Answer 14

2)Higher prices for some consumers: Consumers that are forced to pay higher prices have less to spend on other goods and services and so may lower utility than if the market were competitive

Question 15

What is a natural monopoly?

Answer 15

Monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable

Question 16

What is nationalisation in economics?

Answer 16

When a privately owned firm or industry is taken into public ownership

Question 17

What is privatisation?

Answer 17

Where an enterprise in public ownership is returned to private ownership

Question 18

Name the best natural monopoly example?

Answer 18

Network Rail (railway network) - government owned

Question 19

On a natural monopoly diagram, why is the LRMC curve below the LRAC curve?

Answer 19

This is because the available economies of scale cannot be exhausted by a single firm

Question 20

Why do AC decline in natural monopolies?

Answer 20

Due to high fixed costs being spread over a greater output

Question 21

Why could it be said that a natural monopoly is more productively efficient?

Answer 21

A single firm can satisfy market demand at a lower average cost than two or more firms, so the natural monopoly is more productive

Question 22

An advantage of a natural monopoly?

Greater efficiency?

Answer 22

1)Greater economic efficiency: More scope for productive efficiency as a single firm can better exploit economies of scale. Could be allocatively efficient if subsidised by government

Question 23

A disadvantage of natural monopoly?

Higher prices?

Answer 23

1)Low threat of competition may lead to higher prices: Barriers to entry are so high there is almost not threat of competing firms entering the market because a new firm will be unable to compete in price. Could lead to x-inefficiency as lack of competition reduces incentive to reduce excess stock levels etc higher prices, lower utility

Question 24

Judgement of a natural monopoly, depend upon?

Answer 24

Depends on the objectives. Profit max may see higher prices for consumers. State owned natural monopoly with the objective of maximising societal utility can achieve a more allocatively efficient level of output

Question 25

What is the difference between a natural monopoly and a monopoly?

Answer 25

The fact that natural monopolies have extreme economies of scale. That is to say that it can only start to become profitable when one single firm is able to service the majority of the market.

Question 26

Acronym for some of the issues of a monopoly? S.P.E.W

Answer 26

S-service (does the lack of competition affect the quality of a service to consumers)
P-prices (monopoly prices tend to be higher compared to a competitive situation)
E-efficiencies (lack of productive, allocative and possibly dynamic efficiencies)
W-welfare (welfare on consumers who have a very limited spending power but might necessarily need to purchase a product)

Question 27

What can monopolistic markets cause, which is a negative?

Answer 27

Inequalities in necessity markets